Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation
[2022] FCA 972
•19 August 2022
FEDERAL COURT OF AUSTRALIA
Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation [2022] FCA 972
File numbers: QUD 513 of 2018
QUD 399 of 2019Judgment of: LOGAN J Date of judgment: 19 August 2022 Catchwords: TAXATION – appeal from taxation objection decision under Pt IVC of the Taxation Administration Act 1953 (Cth) (TAA) – s 8-1 Income Tax Assessment Act 1999 (Cth) (IAA) – where Commissioner issued amended assessments of income tax and penalty assessments in relation to claims for “management fees” and interest said to be incurred in respect of purported loans – where burden falls on taxpayer to establish that the Commissioner’s assessments were excessive – where taxpayer failed to establish on the balance of probabilities that the alleged “management fees” were actually rendered or incurred in the income years claimed – where taxpayer failed to establish on the balance of probabilities that the purported loans were actually made, the proceeds of the loans were used in producing assessable income or that the interest claimed was in relation to the alleged loans – application dismissed
TAXATION – appeal from taxation objection decision under Pt IVC of the TAA – s 8-1 IAA – where value of “management fees” and interest were no more than an ex post facto constructions designed to be fiscally convenient for tax purposes – where deductions claimed amounted to shams – whether conduct of the controlling mind and will of the taxpayers, an experienced accountant, amounted to fraud or wilful blindness – held: in fixing the amounts of alleged “management fees” and interest charges, the controlling mind and will of the taxpayers was mistaken to the point of wilful blindness as to the ability to claim deductions in issue
TAXATION – tax shortfall penalties – appeal from taxation objection decision under Pt IVC of the TAA – s 284-90 of sch 1 to TAA – whether intentional disregard or recklessness appropriate – where conduct of controlling mind and will of taxpayers amounted to wilful blindness to application of income tax legislation – held: recklessness penalty appropriate
Legislation: Corporations Act 2001 (Cth) s 1305
Crimes Act 1914 (Cth)
Evidence Act 1995 (Cth) ss 69, 128, 140
Income Tax Assessment Act 1936 (Cth) ss 167, 170, 177C, 177F, 264, Pt IVA
Income Tax Assessment Act 1997 (Cth) ss 8-1, 26-25
Taxation Administration Act 1953 (Cth) ss 14ZZ(1)(a)(ii), 14ZZO, 284-75, 284-90, 284-220, 298-20, sch 1
Cases cited: Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2021] FCA 974
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424
Briginshaw v Briginshaw (1938) 60 CLR 336
Commissioners of Inland Revenue v Duke of Westminster [1936] AC 1
Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473
Federal Commissioner of Taxation v Clark (2011) 190 FCR 206
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1
Giorgianni v The Queen (1985) 156 CLR 473
Newton v Federal Commissioner of Taxation [1958] AC 450
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47
Slutzkin v Federal Commissioner of Taxation (1977) 140 CLR 314
VL Finance Pty Ltd v Legudi (2003) 54 ATR 221
Division: General Division Registry: Queensland National Practice Area: Taxation Number of paragraphs: 214 Date of hearing: 21 September 2020 – 25 September 2020
28 September 2020 – 3 October 2020
7 – 8 October 2020
25 – 26 October 2021
7 December 2021Counsel for the Applicant: Mr J Hyde Page Solicitor for the Applicant: Mark J Ord Lawyer & Consultant Counsel for the Respondent: Ms KA Stern SC with Ms JE Jaques with Ms CT Ensor Solicitor for the Respondent: Australian Government Solicitor ORDERS
QUD 513 of 2018 BETWEEN: MELBOURNE CORPORATION OF AUSTRALIA PTY LTD
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
QUD 399 of 2019 BETWEEN: PHOTO ADVERTISING (INTERNATIONAL) PTY LTD
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
LOGAN J
DATE OF ORDER:
19 AUGUST 2022
THE COURT ORDERS THAT:
1.In respect of each proceeding, the parties endeavour to bring in, on or before 17 October 2022, short minutes of orders to give effect to these reasons for judgment.
2.Failing the filing of agreed short minutes of orders in accordance with Order 1:
(a)the proceedings be listed thereafter on a date to be fixed by the Court after consultation with the parties for the hearing of submissions as to the consequential orders which should be made; and
(b)the parties are to file, on or before 17 October 2022, their respective proposed minutes of orders, together with a related, explanatory outline of submissions of not more than five pages.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
LOGAN J:
Melbourne Corporation of Australia Pty Ltd (Melbourne Corporation) and Photo Advertising (International) Pty Ltd (Photo Advertising) have each invoked the original jurisdiction conferred on the Court by s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) (TAA) to appeal against objection decisions of the respondent Commissioner of Taxation (Commissioner) respectively dated 13 June 2018 and 30 April 2019.
The objections respectively relate to the following:
Melbourne Corporation
(i)amended assessments of income tax for the income years ended 30 June 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2010, 2011, 2012, 2013 and 2014; and
(ii)penalty assessments for the income years ended 30 June 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2013 and 2014.
Photo Advertising
(i)assessments of income tax for the tax years ended 30 June 2006 and 2011; and
(ii)penalty assessments for the tax years ended 30 June 2006 and 2011.
This judgment is published simultaneously with my judgment in an earlier taxation appeal, proceeding QUD 512 of 2018, heard prior to this proceeding (QUD 512 judgment). The occasion for that is explained in the QUD 512 judgment.
In accordance with an order made at the request of the parties in this proceeding, the evidence, oral and written, tendered in proceeding QUD 512 of 2018 has been tendered in this proceeding along with further oral and written evidence. However, as I made plain to the parties, this present proceeding must be determined on the whole of the evidence now before the Court. So I have approached that evidentiary whole on the basis that conclusions, including conclusions as to credibility of witnesses, which I have reached based on that earlier body of evidence are not binding. More particularly, I have adopted the approach that factual issues common to each proceeding may be differently resolved on the basis of the whole of the evidence. Therein may well lie the burden as much as the benefit offered by the procedure adopted for the hearing of this series of taxation appeals.
Common to each present taxation appeal, and every such proceeding, is that a burden falls on the applicant to prove the assessments concerned to be excessive: s 14ZZO, TAA; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614, at 623 – 625. The proceeding being civil in character, it is both necessary and sufficient, in relation to any issues of fact upon which proof that the assessment is excessive depends, that the applicant do this on the balance of probabilities: s 140(1), Evidence Act 1995 (Cth) (Evidence Act); nothing more is necessary but nothing less will suffice. That said, where a finding in respect of a particular issue of fact would entail grave conclusions about conduct, the considerations identified in s 140(2) of the Evidence Act and the preceding discussion of principle in Briginshaw v Briginshaw (1938) 60 CLR 336 must be, and has been, taken into account.
For convenience, I have adopted in this judgment the same shortenings of the names of various corporate actors and legislation as I adopted for the purposes of the QUD 512 judgment. Further, unless I consider that the whole of the evidence in this proceeding dictates a different conclusion, I have not in this judgment again recited the history and ownership, and conclusions reached as to the control of, various corporations and trusts which feature in the QUD 512 judgment. Instead, I adopt that recitation and those conclusions for the purposes of this judgment. To that extent, these reasons for judgment must be read in conjunction with the QUD 512 judgment.
Of the two present taxation appeals, the lead appeal and certainly that which entails the greater number of issues to resolve, is QUD 513 of 2018. I therefore first address the issues in that appeal.
MELBOURNE CORPORATION – QUD 513 OF 2018
Melbourne Corporation was registered on 28 March 1956. Its sole shareholder since September 2004 has been Southsea Nominees. Mr Gould has been its sole director since 1 December 1997. Via Mr Gould’s directorship of Melbourne Corporation and his control of Southsea Nominees, Melbourne Corporation is in all respects controlled by Mr Gould.
The background to Melbourne Corporation’s appeal and the issues which arise for determination are, as the Court’s practice envisages, set out in the respective appeal statements. That of the Commissioner in particular is a model of compliance with that practice. The following account of the background and the issues draws much upon what is there stated with such comprehensive precision.
Melbourne Corporation has claimed deductions under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) over the 2001 to 2014 income year period in respect of what at least purport to be management and consulting fees, and interest expenses, in relation to purported arrangements with various Australian entities. For reasons which I detail below, or have already given in the QUD 512 judgment and adopt, each of those entities, along with Melbourne Corporation, was, in each of those income years, and to the extent material, earlier, under the control of Mr Vanda Russell Gould.
The amended assessments issued to Melbourne Corporation for the income years mentioned at the commencement of this judgment disallowed these deductions. Consequentially, the Commissioner also disallowed deductions for related prior year losses. He also reduced the assessable income of Melbourne Corporation to exclude management and consulting fees and interest income purportedly derived with respect to arrangements with commonly controlled entities, where the Commissioner considered that such fees and interest are not deductible to the entities on the other side of the transactions.
The amended assessments have each been issued pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
By virtue of s 170(1) of the ITAA 1936, the Commissioner’s power to amend assessments in respect of the 2001 to 2007 income years was dependent upon his prior formation of an opinion that there had been an avoidance of tax due to fraud or evasion. The Commissioner formed such an opinion not only in respect of those but also the other income years in question.
For the 2008 and 2009 income years, a consequence of the Commissioner’s audit was that Melbourne Corporation’s income was adjusted downwards. No amended assessments in respect of those income years were issued by the Commissioner on the basis that there were no tax shortfalls in those years.
The Commissioner imposed administrative penalties on Melbourne Corporation in respect of each of the income years 2001 to 2007 and 2013 to 2014 pursuant to s 284-75(1) of Sch 1 to the TAA on the basis that Melbourne Corporation made a statement to the Commissioner that was false or misleading in a material particular, with the amount of the base penalty under item 1 of the table in s 284-90(1) being 75% of the tax shortfall because the shortfall resulted from intentional disregard of a taxation law by Melbourne Corporation or its agent. The Commissioner increased the penalty rate of 75% pursuant to s 284-220 of Sch 1 to the TAA by 20% to 90% for the income years after the 2001 income year on the basis that a penalty had previously been imposed.
Details of the adjustments as made by the respective amended assessments are:
Year ended
30 JunePrevious taxable income Amended taxable income Penalty (2001 at 75% and other years at 90%) Shortfall interest charge 2001 -71,971 143,135 36,499.43 0 2002 0 50,104 13,528.05 0 2003 42,492 169,102 34,184.07 0 2004 53,386 532,851 129,455.55 0 2005 70,950 519,359 121,070.40 107,887.07 2006 31,233 220,384 51,070.75 36,615.57 2007 20,420 175,594 37,260.15 20,334.89 2010 4,750 0 0 0 2011 11,612 0 0 0 2013 2,980 205,879 54,782.70 6,225.38 2014 2,166 414,663 111,374.15 4,683.02 168,018 2,431,071 589,225.25 175,745.93
The Commissioner determined not to remit the penalties pursuant to s 298-20 of Schedule 1 of the TAA. Melbourne Corporation no longer presses any challenge via its taxation appeal to that remission decision.
Melbourne Corporation objected against these amended assessments and the penalty assessments. The Commissioner decided to disallow these objections by the objection decisions identified at the commencement of this judgment.
As to the 2001 to 2007 income years, one basis upon which Melbourne Corporation seeks to prove the income tax assessments to be excessive is by challenging the validity of the opinion as to fraud or evasion formed by the Commissioner. I set out in the QUD 512 judgment my understanding of what materially constitutes fraud or evasion and what is entailed in a challenge in an appeal such as the present to amendments based on the formation by the Commissioner as to the occurrence of an avoidance of tax due to fraud or evasion. I do not repeat what is there stated. Melbourne Corporation did not demonstrate, by reference to the material before the Commissioner at the time, some error of principle in the formation of his opinion. However this may be, a corollary of the conclusions I reach below as to both management fee and interest deduction claims is that I am not satisfied that Melbourne Corporation has established on the evidence that it was not open to form an opinion that there had been an avoidance of tax due to fraud or evasion insofar as that was necessary for the issuing of amended assessments in respect of the income years concerned.
In respect of the amended assessments for each of the income years in question, it is for Melbourne Corporation to prove the claimed management and consulting fees and interest expenses were allowable deductions under s 8-1 of the ITAA 1997.
As to that, the issues have become whether they were:
(a)management or consulting fees or interest at all, including whether their being so designated was but a sham and, as to the interest claims, whether there was any related loan;
(b)incurred at all;
(c)incurred in gaining or producing the assessable income of Melbourne Corporation or necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income;
(d)as to interest claimed in relation to the purported loan from the AA Trust, denied deductibility pursuant to s 26-25 of the ITAA97, because of a failure to withhold tax from that purported interest payment.
Further and in any event, because the Commissioner has determined pursuant to s 177F of Pt IVA of the ITAA 1936 that the whole of the deductions shall not be allowable to Melbourne Corporation, on the basis that the deductions are tax benefits within the meaning of s 177C of that Act as a scheme or schemes which were entered into or carried out for the dominant purpose of obtaining those tax benefits, it is for Melbourne Corporation to prove that those deductions are not such tax benefits within the meaning of Part IVA.
There are no separate issues for determination in relation to prior year losses. It is common ground that, if the Court finds that any deductions claimed for interest or management and consultancy fees are not allowable, then the prior year losses claimed should be reduced accordingly.
If it is that the deductions denied by the Commissioner are allowable, there may be an issue as to whether amounts of management and consulting fee income and interest income reversed by the Commissioner are assessable to Melbourne Corporation.
With respect to the penalty assessments (and in to the extent that Melbourne Corporation fails to prove the income tax assessments to be excessive), the issues are now whether:
(a)penalties were correctly imposed at a rate of 75% of the tax shortfall.
(b)penalties were correctly increased by 20% for all but the first year assessed.
It is convenient first to consider whether the claimed management and consultancy fee deductions are allowable.
The deductions in issue and the persons in respect of whose services management and consultancy fee deductions are allegedly incurred are summarized in the table below:
Year ended
30 JuneAnglo American Trust Debbie Gould Melbourne Insurance Gould Family Trust Philadelphia Investments Leaver Trading Total Amount 2001 50,000 14,000 1,000 115,000 - - 180,000 2002 - - 1,000 - 17,000 - 18,000 2003 - - - 68,000 - - 68,000 2010 - - - - - 6,500 6,500 2011 - - - 5,000 - - 5,000 Total 50,000 14,000 2,000 188,000 17,000 6,500 277,500
Some of these entities have already been described by incorporation by reference of findings made concerning them in the QUD 512 judgment. For some of these, it is desirable to give further detail. Others have not earlier been described.
The “Debbie Gould” in the table is Mr Gould’s former wife, Mrs Deborah Anne Gould. Oddly and inconsistently with Melbourne Corporation’s claim, her tax return for the 2001 income year does not disclose any income from Melbourne Corporation. I did not have the benefit of hearing evidence from Mrs Gould explanatory of this or upon any other subject concerning the services she is said to have rendered in the 2001 income year. That is because she was not called as a witness. Given the statutory onus of proof, it was for Melbourne Corporation to call her. No satisfactory explanation was given for the absence of evidence from her.
Philadelphia Investments was incorporated in Australia on 8 June 1979. Since 10 September 2004, all of its issued shares have been held by Southsea Nominees. Mr Gould has been a director of Philadelphia Investments since 1 December 1997.
Leaver Trading Pty Ltd (Leaver Trading) was incorporated in Australia on 26 October 1982. Its shareholders are Mr John Leaver and Phillips River (as to 50% of issued shares each). Since 20 May 1982, Mr Leaver a director of Phillips River. He is currently its sole director. Mr Gould was a director of Phillips River from 20 May 1982 to 20 March 1989. Mr Leaver was another unexplained absentee from Melbourne Corporation’s evidentiary case. Once again, it was for Melbourne Corporation to call him, if his evidence were of assistance to its case, or to provide a satisfactory explanation for his absence.
Each of the entities in the above table was either Mr Gould’s spouse or within a group of companies which Mr Gould accepted were his private entities, subject to his effective, even if not formal, control.
Management fees claims – general
Although each such claim must be individually determined, Mr Gould’s evidence was that he adopted a usual practice in the fixing of management fees and, for that matter, on intra-group loans. It is therefore convenient first to make some general observations about this practice and to set out related conclusions.
Using the 2001 income year and the AA Trust deduction claim as an example upon which to base these general observations, Melbourne Corporation claims, and Mr Gould’s initial evidence (in 2012, in response to a notice under s 264 of the ITAA 1936) was that this is a consulting fee for “funds management” with the services provided by “the directors on behalf of the Anglo American Trust” (AA Trust), with payment being made by way of journal entry. He later gave other accounts, which I detail below. The journal entries in the general ledger of Melbourne Corporation for the 2001 income year reallocate the amount of fees payable to the AA Trust to show them as being payable to Southsea Nominees Pty Limited as trustee of the Gould Family Trust (Gould FT).
The individual by whom the AA Trust rendered the services for Melbourne Corporation is said to be Mr Gould.
As with this particular management fee deduction claim, each of the other claims is sought to be proved by a combination of evidence from Mr Gould attesting to the rendering of the service and a journal entry.
Prima facie, the journal entries offer some support for the incurring of a liability in respect of the rendering of a management service as claimed: s 1305, Corporations Act 2001 (Cth), Federal Commissioner of Taxation v Clark (2011) 190 FCR 206 (Clark), at [65]; and see also in any event, s 69, Evidence Act.
Melbourne Corporation was carrying on business for the purpose of gaining or producing assessable income in the income years in question. Thus, if one accepts the particular account given by Mr Gould and the journal entry, a foundation for a claim under s 8-1 of the ITAA 1997 is apparently made out. That is Melbourne Corporation’s case in respect of each of the claimed deductions.
Under cross-examination in the present proceeding, Mr Gould stated that he determined management fees and interest “around the time or, you know, prior to the preparation of the financial statements.” He later resiled from this, maintaining that he reviewed draft accounts prepared by staff and, prior to the end of a given income year, determined the amount of a management fee and to whom it was payable. He said he adopted a like practice in relation to the determination of interest on intra-group loans.
With one possible exception, there are no contemporary written agreements or other documents such as board minutes, invoices, billing records, calculation sheets or correspondence in evidence supporting the existence of any arrangement for the provision of management services by any of the entities concerned to Melbourne Corporation. The possible exception is in respect of those said to have been rendered by Leaver Trading. An invoice from Leaver Trading is in evidence, although it appears to relate to other than the 2010 income year, which is the only year in which management services are said to have been provided by that entity.
Melbourne Corporation submitted, and I accept, that the absence of a written agreement or of other documentary records is not, in itself, of any particular moment. There is nothing remarkable about informality attending either the internal managerial affairs of Melbourne Corporation or any other of the other entities which Mr Gould controlled or the relations between those entities. In Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473, at 489, Kearney J recognized just this characteristic of a closely held and controlled group of private, family companies, observing, “Within a group of companies, it is not surprising for internal arrangements to be made informally.” Similarly and with reference to the alleged making of loans the existence of which was supported only by book entries and testimony that the agreement for a loan had been made orally, Nettle J, then a judge of the Supreme Court of Victoria, stated in VL Finance Pty Ltd v Legudi (2003) 54 ATR 221, at [30]:
[30]In the circumstances I think it suffices to say of the book entries point that, in the absence of any suggestion of sham, there is no reason why loans agreed to by made by a family company to members of the family cannot be created orally or by conduct and sufficiently evidenced by book entry, and that it is enough to dispose of the consequences of the lack of cash in hand contention to observe that it has been the law since Spargo’s case that obligations may effectually be set off one against another, leaving a net balance due, without any money changing hands.
[Emphasis added - footnote references omitted]
The qualification expressed by Nettle J in relation to sham and set-off will be noted.
Sometimes, the informality in relations will be such that one is left just to infer the existence of an agreement by conduct: Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424, at [369].
A great disservice can be done to the Australian business community, especially the small business community, by a failure on the part of the Commissioner, in his administration of national taxation laws, to recognise, as the courts do in cases great and small and in circumstances extending across a wide range of controversies, these ordinary features of Australian commercial life.
All this said, where, as here, informality is present, much can depend on the credibility one affords the accounts given by participants and, where they exist, representations in business records created under their supervision or with their approval.
It may readily be accepted that a corporation does not manage itself. This, too, was a point made by Melbourne Corporation. By the 2001 income year, Melbourne Corporation was serving Mr Gould’s private business interests and those of some clients in his career following his cessation of direct involvement with the Gould Ralph incorporated accountancy practice. I accept that Mr Gould devoted some of his time to serving the interests of Melbourne Corporation in the 2001 income year and other income years for that matter. Other individuals did, too. At this level of generality, this part of Mr Gould’s evidence I accept.
However, again to use the deduction claim concerning the AA Trust in the 2001 income year as an example, that claim is that a particular entity rendered this service in a particular amount. Moreover, in this particular income year, other entities allegedly did too – Mrs Gould, Melbourne Insurance and the GF Trust. Further, the combined total of the management fees claimed for the 2001 income year is about two thirds of the total in controversy and some three times greater than any amount claimed in any other of the income years in controversy.
There are truly great fluctuations in the range of alleged providers of management services and in the amounts said to have been incurred for the provision of such services. Yet further, although Melbourne Corporation and the AA Trust each thereafter remained members of Mr Gould’s group of private entities, of the income years presently in question only in the 2001 income year has the AA Trust allegedly rendered management services to Melbourne Corporation.
If one widens the income year focus to the 2001 to 2015 income years, the general ledgers of Melbourne Corporation and the AA Trust disclose that the only additional record of a management fee having been incurred by Melbourne Corporation to the AA Trust is in 2003 in the amount of $4,735. Yet in the 2003 income year, the general ledger and financial statements of the AA Trust record that the AA Trust paid an identical amount of management fees to the amount of management fees it received.
Again looking to the 2001 to 2015 income year period, in each of the 2013 to 2015 income years, only a $500 fee in respect of management services is recorded in Melbourne Corporation’s general ledgers with each specified as having been incurred on 30 June, to the GF Trust.
In my view, Mr Gould gave two plausible and related explanations for these features of the 2001 income year and of the radical differences in entity and amount within this year and from year to year over the years of the management services claims by Melbourne Corporation. One was in the answer, already quoted, from which he later resiled. The other was in a series of answers given by Mr Gould in the course of his oral evidence, which I now detail, albeit at some length (with parenthetical, related transcript and tender bundle “R” references). As it happens, the passages concerned have been taken up in the Commissioner’s submissions (Appendix C). Of all of his oral evidence (both as tendered from proceeding QUD 512 of 2018 and as additionally given in the present proceeding), I thought this evidence was the most candid given by Mr Gould.
(P-283 line 5): “I would have to draw upon my sort of, you know, tax knowledge as to whether to actually – to actually, basically, some form of management fee or just to let it be.”
(P-287 to P-289): There would be “an element of truth” in the proposition that management fee entries were made for tax planning purposes. Reference decision of Mr Justice Williams (identified at P-309 as Tweedle v FCT (1942) 180 CLR 1) and Ronpibon Tin v FCT (1949) 78 CLR 668. (P-287 line 7)
A “consideration” in recording something as a management fee was to enable Melbourne Corporation to claim a deduction and not have any taxable income in that year. (P-287 line 27)
“I … would have had an eye on the tax planning” (P-288 line 13). “I don’t disagree” that “a management fee was in fact quantified to reflect an amount that suited [Mr Gould’s] tax planning purposes for Melbourne Corporation” (P-288 line 38).
Agreed that “[tax planning] was the only factor [in quantifying a management fee] save .. that you sought to ensure that the fee was, in your words, not an unreasonable sum”. (P-288 line 40)
“I would not have paid it had – have done a situation where Melbourne Corporation paid a management fee to another company which in itself then had a tax problem because of it. It would be highly unlikely I would do that.” (P-289 line 5)
(P-292 line 1): Melbourne Corporation may not charge onwords for work Mr Gould does for another company “was just part of, you know, the usual tax planning that one did”.
(P-324 line 15): accounts were “primarily designed for the obligations for taxation purposes”. Also P-324 line 45.
(P-347 to 349): ensuring Melbourne Corporation minimised its taxable income was a consideration “Absolutely. Certainly a consideration the tax planning is, you know, that’s my job and basically, yes.” (P-347 line 41).
“…. the tax claiming comes in when you look at saying, well, can we also pay some, maybe, some managing fees. Or maybe, some superannuation payment. They’re the two which have a bit more flex, a bit more variability to them.” (P-348 line 33).
“I need, ultimately, to do some calculations for Melbourne Corporation itself to work out whether it also needs to pay management fees or some superannuation in terms of its tax planning.” (P-349 line 4).
With reference to R6417 showing management fees of $200,000 and income of $336,745.12, “the primary consideration in including that [management fee] entry was “Absolutely” for tax purposes. “Basically, the tax planning, you know would be critical in terms of working out what was required to be paid here” (P-349 line 39).
(P-353 line 5): “…. in the end, interest was applicable. How I dealt with it each – year by year was a matter to some extent for me. For instance, could Melboure Corporaiton pay it? Was it relevant to the calculation of Melbourne’s taxable income, would be a factor, I guess.”
(P-354 line 20): “… it was little point in basically necessarily making the journal entries [for interest] if essentially it was essentially an academic issue [by which is meant] if the company was in a loss, bringing to account to make sure some interest accrual of a liability would just increase the loss. So from a tax point of view, it would be an academic issue.” Also lines 30-47.
(P-356 lines 20-38): “… may choose to elect not to pay interest … on the other hand, they could elect and so to pay interest… that’s just normal tax planning which goes on in every family group.”
(P-378 lines 1-5): choosing to pay management fees.
(P-378 line 40): “I just gave in the illustration about the director owing money to his company, he doesn’t have to charge the company for interest if he chooses not to. That’s the way the tax world works.”
(P-379 lines 1-12): Re factors in charging management fees being minimising taxable income in the entity charging the fee but equally the tax on the recipient.
(P-380 line 1): “obviously I’m doing internal tax planning within the group, that’s true” (as part of a related exchange at P-379 lines 38 to P-380 lines 41).
(P-381 line 35): “I chose to do the tax accounting in the form I did – management fees rather than interest…. Yes, of course the tax position of the company is of critical importance.”
(P-382 line 19): “I have a degree of flexibility as to where I determine the liability should be paid from.”
(P-382 line 40): “obviously, I do have the discretion to work through what should be done at the end of each financial year.”
(P-382 line 43): Agreed that the amount in question was the only interest that Melbourne Corporation was liable to pay “for tax purposes”.
(P-382 line 36): “That is Australian tax planning that, essentially, you work out within your group where tax should be paid and you endeavour to minimise it, if you can.”
(P-415 line 45): responds “well certainly” that “the most likely explanation for the 1.6 million accured interest charge is that that was an entry made consistent with the practice you described this morning namely, to try to minimise the tax liabilities of the company.”
(P-497 line 25): “fundamentally … these accounts are prepared for tax purposes.”
(P-535 to P-536): I questioned Mr Gould about the loan arrangement and early tax cases.
(P-557 to P-558): I questioned Mr Gould about the term “balancing charge” and Mr Gould agreed that the Court could form the view, at least subjectively, that his purpose “is just to get a tax deduction by a label which one uses – either management fee or interest” (P-558)
[sic]
I was provoked to put to Mr Gould that the management fees and interest were “balancing charges” by the experience of hearing Mr Gould’s oral evidence in proceeding QUD 512 of 2018, as tendered in this proceeding and the succession of answers, related in the above excerpts, in the course of his cross-examination in the present proceeding. I detected no hint of pretence, only disarming, unapologetic frankness in the answers given by Mr Gould in these excerpts.
It has been recognised at the highest level that revenue law considerations influence the form of most business transactions: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404, at 416. That is very different to giving the appearance of a business transaction so as to yield a benign tax consequence.
Allowing everything for the informality which might attend an arrangement, I am just not satisfied on the balance of probabilities that the AA Trust rendered any management services to Melbourne Corporation in the 2001 income year, much less that Melbourne Corporation incurred in that income year any expense, much less one in the amount of $50,000, in respect of such a service. I am of the same view in respect of each other claim for management services. These were just, as Mr Gould also admitted (at p 558), “closing adjustments”, “made to achieve the best overall tax outcome for the group”. As Mr Gould conceded (at p 558), the management fees had “a motivation of working out how to do the tax affairs of the entire group”.
The impact of this particular claimed management fee, and the others in context, in conjunction with the claimed interest deductions, also in contest, is obvious enough. In most of the income years in question, Melbourne Corporation’s income tax position, as returned, was that it had no tax liability. That was not, I find, a coincidence, but rather the result of a succession of ex post facto constructs by Mr Gould. The answer from which Mr Gould later resiled was true. It is inherently more likely than not, and I find, that the amounts of management fees, and interest, were fixed by Mr Gould after the close of the financial year to which they purported to relate and at a time when the financial accounts for the year concerned were prepared for his approval. In the exercise of the control he had over the entities concerned, he fixed those amounts arbitrarily and solely for taxation purposes. The resultant entries in accounts and tax returns were a mere charade.
Not everyone might agree with the famous observation by Holmes J (with whom Brandeis J agreed) in Compañía General de Tabacos de Filipinas v Collector of Internal Revenue 275 US 87 (1927), at 100, “Taxes are what we pay for civilized society”, as an equally famous dictum of Lord Tomlin in Commissioners of Inland Revenue v Duke of Westminster [1936] AC 1 (Commissioners of Inland Revenue v Duke of Westminster), at 19, “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be” attests. But everyone agrees that the ordering of affairs must be real, not an ex post facto construct, a mere sham.
Although a discrete body of evidence was led in relation to the management fee deduction claims and the interest deduction claims, it seemed to me more likely than not on the whole of the evidence that Mr Gould adopted like ex post facto practices in relation to interest deduction claims to those he did with management fee deduction claims. This conclusion has in turn also informed why I have concluded that neither has been proved on the balance of probabilities.
In conjunction with his submission that management fee and interest fee deduction claims were just ex post facto constructs by Mr Gould, the Commissioner put that, as Brennan J, at 618, and Toohey J, at 627, in Dalco recorded and Yeldham J had done at trial on the evidence in that case, I should conclude on the evidence in the present case that Mr Gould had “completely disregarded corporate structures and entitlements or used them purely for convenience in the lending of money and the claiming of expenses”.
It is true that there is a disregard present here on the part of Mr Gould, or rather better put, a wilful lack of regard for the obvious, but that is in respect of the creation of an appearance of the incurring of deduction entitling expenditures in a given income year after the close of that income year. This is not a case where the interest income or management fees were in fact in respect of services performed or monies lent by Mr Gould personally under a corporate façade. In the present case, it has not been proved on the balance of probabilities that the services for which management fees were allegedly incurred or that the interest allegedly incurred was incurred either at all or as claimed. I do not therefore accept that, in this sense, the present case is like Dalco. It is, however, like Dalco in that the taxpayer has not discharged the statutory onus of proof and adopted a complex web of controlled corporate actors.
Explaining further why I am not satisfied that any of the management fees claimed was incurred as claimed and that each is a sham requires that I now additionally detail particular features of the evidence in relation to the particular income years in which they are claimed.
The Commissioner offered in submissions a detailed analysis of the evidence in respect of each claimed management fee. Regard to the evidence concerned discloses that the analysis is well-grounded in that evidence. I have therefore much drawn upon the submission in the following.
Management fee claim – the AA Trust – 2001 income year
I have used some features of this particular claim for the purpose of making some general observations above. As already noted, an explanation given by Mr Gould in 2012 for what the services provided by the AA Trust entailed in the 2001 income year was that they were “funds management” and that the services were provided by “the directors” on behalf of the AA Trust. In his later affidavit evidence in chief, Mr Gould stated that the fee was charged for “work done by” the AA Trust. Under cross-examination, Mr Gould gave varying accounts. At one stage, he stated that he could not “recall that far back”. Later, he stated that a “very significant aspect” of the fee was a guarantee fee. Yet later, in response to the suggestion that the AA Trust had not provided management services, Mr Gould stated:
you had a series of investments in clients of [Melbourne Corporation]. So that it had the ability, like without funding which came out of Anglo Australian Christian and Charitable Fund, income could not have been derived by [Melbourne Corporation].
These accounts are not readily reconciled either with each other or with the statement in Melbourne Corporation’s Appeal Statement, filed on Mr Gould’s instructions, that Melbourne Corporation and the AA Trust had “agreed that $50,000 should be payable by [Melbourne Corporation] as consideration for work done by Mr Gould to manage [Melbourne Corporation]”. Nor do they offer any insight into how $50,000 came to be fixed as a fee.
All the more difficult to reconcile with the payment of a fee by Melbourne Corporation to the AA Trust, which had no employees, for the services of Mr Gould (as director of Anglo American, the trustee of the AA Trust) is that, in the 2001 income year, Mr Gould was a paid employee of Melbourne Corporation in respect of whom that company also made superannuation payments. In theory, it might be possible for an individual to undertake some duties for an entity as an employee of that entity and some duties on behalf of a corporate consultant to that entity. Also in theory, in small business and within a tightly controlled group of companies, much informality might attend such an arrangement. In practice, and in the context of a controversy emerging in a taxation appeal, acceptance that such an arrangement existed would, and in this case did, require precise and credible proofs. Melbourne Corporation’s case lacked this.
The related journal entry in Melbourne Corporation’s general ledger (a term shortened to GL as appropriate) is dated 30 June 2001 but there is no indication on the face of the ledger as to when it was prepared. There is a consistent entry in the 2001 general ledger of the AA Trust recording consulting fee income of $50,000 from Melbourne Corporation on 30 June 2001. However, Melbourne Corporation’s 2001 general ledger also records $51,000 of consulting fee income from Melbourne Corporation on 30 June 2001. Why on 30 June 2001 Melbourne Corporation has both purportedly incurred a management fee liability and derived a similar amount by way of consulting fee income is not clear. The Melbourne Corporation general ledger records a reallocation to Southsea Nominees, another company controlled by Mr Gould. Yet Mr Gould’s affidavit evidence was that there was a novation to the GF Trust (of which Southsea Nominees was trustee), also controlled by Mr Gould. Further, the general ledger of the GF Trust and its financial statements for the 2001 income year only record consulting fee income of $35,656.19.
Once again, for reasons which I can canvas in the QUD 512 judgment, I accept that a novation might occur informally within a closely controlled group of private companies. However, exactly what is to be made of these inconsistent entries, considered together, remains something of an evidentiary mystery. And evidentiary mysteries do not make for proof on the balance of probabilities.
Management fee claim – Debbie Gould – 2001 income year
To read Mr Gould’s letter to the Commissioner dated 15 December 2017, one might think that the basis upon which Mrs Gould was entitled to some form of consulting fee income was because she was a director of various companies within the group of private entities. Yet she did not become a director of Melbourne Corporation until 1 February 2008.
In Melbourne Corporation’s Appeal Statement, the sum of $14,000 is said to be referable to an amount agreed as between Mr and Mrs Gould for work done by her to manage Melbourne Corporation. Mr Gould’s affidavit evidence was not necessarily inconsistent with this. In that he stated that Mrs Gould “sometimes [did] things to help at my workplace” and that he remembered her “helping with the storage and filing of documents”. However, in cross-examination, Mr Gould stated:
Debbie Gould, you know, would have accompanied me basically going, I mean, often on trips to see Jim Raptis. We would have done inspection of properties. All sorts of things. And, basically, that’s – I mean, she was entitled to something.
Consistently with this answer but not with the statement in the Appeal Statement filed on his instructions that there had been an agreement, Mr Gould also stated under cross-examination that there was no pre-existing liability to make a payment of $14,000 to Mrs Gould.
In a letter to the Commissioner dated 15 December 2017, Mr Gould stated that the $14,000 consulting fee was returned by Mrs Gould in her 2000 income year return. Yet Mr Gould stated in his affidavit evidence that he had decided on the fee on 1 July 2000, the first day of the 2001 income year. That accords with the journal entry in Melbourne Corporation’s general ledger, which includes an entry dated 1 July 2000 in respect of a management fee liability to Mrs Gould. In cross-examination, Mr Gould stated that he had “tax planning implications” “in mind” when selecting the $14,000 figure.
When cross-examined about the answer in the letter and the statement in his affidavit, Mr Gould stated, “That does seem to be in my affidavit an error in terms of the date. The date, when I think about it, just doesn’t feel right” and “it seems more logical to me that it’s in the preceding year”.
However this may be, payment of this liability did not, on Melbourne Corporation’s case, occur until 2002. A debit entry of $13,000 dated 12 March 2002 in Melbourne Corporation’s bank account statement is said to record part payment of the fee owed to Mrs Gould. There is a related entry of 12 March 2002 in Melbourne Corporation’s general ledger in respect of a payment to Mrs Gould. The balance of $1,000 is said to have been added to Mrs Gould’s loan account which was then re-allocated to Mr Gould via an entry in Melbourne Corporation’s ledger of 30 June 2005. While these two general ledger entries explain how a liability apparently incurred in the 2001 income year was ultimately discharged, they do not explain why it was said Mrs Gould had returned the receipt of management fee income in the 2000 year.
Exactly what Mrs Gould did to warrant the payment of a management fee is not clear on the evidence recited. Nor is it clear that there was ever an antecedent agreement, however informal, that she would provide services to Melbourne Corporation. It is not even the position on the evidence that she undertook to provide services on the basis that a fair amount for that would be worked out at some stage before the end of the 2001 income year. The figure of $14,000 just looks arbitrarily to have been fixed by Mr Gould at some stage prior to the submission of Melbourne Corporation’s 2001 income year tax return.
More likely than not, the amount was fixed on or after 19 April 2002. The 1 July 2000 entry in the Melbourne Corporation general ledger relied upon on is GJ000068 dated 30 June 2001. Yet entry GJ000065 in this general ledger is dated 19 April 2002.
Management fee claims – Melbourne Insurance – 2001 and 2002 income years
Melbourne Insurance was registered on 19 October 1987. It has 2 shares on issue, which have been held by Southsea Nominees as beneficial owner since 10 September 2004. Prior to this, one share was held by Mr Gould (not as beneficial owner) and one share by Mr Leaver (as beneficial owner). Southsea Nominees is the trustee of the GF Trust. Mr Warwick Desmond Davies has been a director of Melbourne Insurance since 29 June 2009. Mr Davies was not called to give evidence. His absence was not explained. Mr Henry George Townsing was a director between 28 June 2010 and 1 July 2010. Mr Gould was a director on 17 May 2016, on 29 February 2016 and between 12 September 2007 and 29 June 2009, and earlier between 21 August 1989 and 1 September 1989. Mr Leaver was a director between 1 September 1989 and 12 September 2007.
In respect of the 2001 income year management fee claim, accounts have differed over time as to what it represents.
In the letter to the Commissioner dated 15 December 2017, Mr Gould stated that “Melbourne Insurance expenses were filing fees and bank charges. The expenses were in principle reimbursed by Melbourne Corporation in the form of management fees”. Yet, in the Appeal Statement, it is stated that Mr Gould and Melbourne Insurance made an oral agreement that Melbourne Insurance would provide management services to Melbourne Corporation, and that, during each of the 2001 and 2002 income years, Melbourne Corporation and Melbourne Insurance agreed that $1,000 should be payable by Melbourne Corporation as consideration for work done by Melbourne Insurance to manage Melbourne Corporation.
On the other hand, in his affidavit evidence, Mr Gould stated that, on or about 30 June 2001, he “determined that Anglo American should also charge Melbourne Corporation the sum of $1,000 as a fee, and that Anglo American should novate this $1,000 entitlement to Melbourne Insurance”. On that account, if true, the liability was in respect of services proved by the AA Trust the liability in respect of which was novated to Melbourne Insurance. Also in his affidavit evidence, Mr Gould stated:
The reason I thought it would be desirable for Anglo American to novate the $1,000 receivable to Melbourne Insurance was because I regarded Melbourne Insurance as having a need for financial support. Melbourne Insurance was not engaging in income earning activity, but I expected the company would continue to have expenses.
In cross-examination, Mr Gould stated:
No doubt basically the driver of doing something about it was the fact that Melbourne Insurance had actual incurred expenses, where do we get the money from. So basically, that’s why the management fee was paid and brought to account.
Melbourne Insurance’s financial statements for the 2001 and 2002 income years are in evidence. These disclose that, while its assets in the form of cash at bank and money owing in loans for those two years were modest ($4,000 in 2001 and $5,000 in 2002), its expenses were even more so ($335 and $535 respectively). In any event, notwithstanding the asserted need for Melbourne Insurance to have income, its bank statements, read in conjunction with its general ledger do not record the 2001 fee in respect of management services as paid until 9 April 2002.
The 2001 year income tax return for Melbourne Insurance discloses no business income at all.
As for the asserted novation by the AA Trust to Melbourne Insurance, while the general ledger of the AA Trust for the 2001 income year does record the separately claimed $50,000 management fee in asset account 1-8350, it neither contains a record of the claimed $1,000 management fee nor any reallocation of that fee to Melbourne Insurance.
As for the 2002 income year claim, Mr Gould did not, in terms, address this in his affidavit evidence, although he did confirm that the Appeal Statement was filed on his instructions. If the service was in fact rendered by the AA Trust with the liability to pay it being novated to Melbourne Insurance, that explanation would find no support whether in the financial statements or the general ledger of the AA Trust for the 2002 income year, which make no reference to any such fee or its reallocation.
There is a journal entry (00858342, dated 30 June 2002) in Melbourne Corporation’s 2002 general ledger in respect of the claimed $1,000 management fee but this entry looks to have been created after 13 February 2003. That is because its bears a later journal entry number than these preceding entries in Melbourne Corporation’s 2002 general ledger:
(a)00858341 dated 13 February 2003;
(b)00858340 dated 30 January 2003;
(c)00858339 dated 29 January 2003; and
(d)00858338 dated 24 January 2003.
The 2002 year income tax return for Melbourne Insurance discloses no business income at all. Looking to the AA Trust’s income tax returns for the 2001 and 2002 income years on the basis that it may have rendered the service with the liability being novated leaves one none the wiser. That is because only the claimed $50,000 management fee in its 2001 tax return and no business income at all is shown in its 2002 income tax return.
Another mystery is that, apart from the 2001 and 2002 income years, the financial statements and general ledgers of Melbourne Insurance contain no record of its accrued consulting or management fee income in the 2003 to 2005, 2007 to 2009 and 2011 to 2014 income years. Melbourne Insurance’s general ledger and financial statements do record the derivation of management fee income in the 2006 and 2010 income years. For Melbourne Corporation, even nominally, to derive management fee income is therefore something of an aberration on the face of its accounting records.
Perhaps some further light might have been shed on these particular management fee claims by Ms Dorothy Lewis who was also a director of Melbourne Corporation in the 2001 income year, or by Mr Leaver, who was in that income year the sole director of Melbourne Insurance in these income years. Neither was called.
As it is, it is unclear on the evidence by which individual Melbourne Insurance provided a service to Melbourne Corporation in the 2001 income year. In that income year and the 2002 income year, according to its general ledger, financial statements and income tax return, it paid no wages at all. So, if these are to be believed, the service was not rendered by an employee of Melbourne Insurance. Equally unclear is the occasion for Melbourne Corporation to look to either the AA Trust or to Melbourne Insurance for management services in circumstances where Mr Gould was a paid employee of Melbourne Corporation in these income years.
Management fee claim – the GF Trust – 2001 income year
Inconsistency of explanation also attends this management fee claim.
In the letter to the Commissioner dated 15 December 2017, Mr Gould stated that:
(a)the $115,000 was payable to Darlington McCarthur;
(b)the management fees were not payable to Southsea Nominees or the GF Trust;
(c)the related income was not receivable by Southsea Nominees or the GF Trust; and
(d)the income related to Darlington McCarthur.
In his affidavit evidence, Mr Gould made these statements:
(a)On or about 30 June 2001, he decided that Darlington McCarthur should charge Melbourne Corporation the sum of $115,000 as a fee;
(b)It is not correct to say that this amount was a management fee that Melbourne Corporation was charged by the trustee of the GF Trust;
(c)He “used Darlington McCarthur to hold assets for clients in a nominee capacity and also to perform nominee transactions. In cases where [Mr Gould] did this, the relevant client was charged a fee.”
(d)In June 2001, Mr Gould decided that Darlington McCarthur should charge Melbourne Corporation a fee of $115,000 as consideration for the role that Darlington McCarthur played in his personal accountancy practice, and that Darlington McCarthur should novate its entitlement to the $115,000 management fee so that this entitlement was held by the trustee of the GF Trust; and
(e)He “thought it was permissible for Melbourne Corporation to claim a deduction for the $115,000 management fee because the provision of nominee services to clients of [Mr Gould’s] accountancy practice was a source of revenue for Melbourne Corporation”.
These statements were tested in cross-examination. Mr Gould was unable to explain the differing explanations as between the letter of 15 December 2017 and his affidavit evidence. This particular topic of cross-examination culminated in Mr Gould stating that “in no place is a complete, comprehensive explanation given” in respect of the explanation for the fee.
There is no body of contemporary documentary evidence which makes reference to the provision by Darlington McCarthur of nominee services to clients, for example, by the holding of assets for them. Nor are there contemporary documents in evidence which make reference to how Melbourne Corporation derived income as a result of the provision of nominee services to clients of Darlington McCarthur. An amount of $115,000 does appear in the 2001 general ledger of Darlington McCarthur. But that records $115,000 as having been received from Gould Ralph Services. Further, the 2001 income tax return of Darlington McCarthur returns this $115,000 as income, which is inconsistent with any explanation that it novated a liability of Melbourne Corporation to pay it to the GF Trust before 30 June 2001. Even though returned as income by Darlington McCarthur, the inclusion was nonetheless prima facie tax effective, in light of deductions claimed by it in that income year. In the result, it had no tax liability for that income year.
The 2001 financial statements and general ledger of the GF Trust make no reference to any accrual of $115,000 as income. That is consistent with the 2001 income tax return of the GF Trust, which does not return this sum as income.
Mr Gould was a director of Darlington McCarthur in the 2001 income year. In that income year, Darlington McCarthur had no employees. Once again, if it were via Mr Gould that Darlington McCarthur rendered services to Melbourne Corporation, why this was done in circumstances where Mr Gould was employed by Melbourne Corporation was not explained.
Also once again, on the face of accounting records in evidence, the incurring by Melbourne Corporation of a management fee liability to the GF Trust, or Darlington McCarthur for that matter, is something of an aberration. Melbourne Corporation’s financial statements and general ledger do not record any fees having been incurred by Melbourne Corporation to Darlington McCarthur or to the GF Trust (or Southsea Nominees for that matter) in any of 2002, 2005 to 2010, or in 2013 or 2014 income years.
As for Darlington McCarthur, on the face of accounting records in evidence, it did not accrue management fees from any entities at all in 2002 to 2005, or 2007 to 2014 income years. On the other hand, it incurred management fees to other entities in 2002, 2003, 2006, and 2011 income years.
As for the GF Trust and again on the face of accounting records in evidence, it did not accrue “management” fee income from any entities at all in 2000 to 2002, 2005 to 2008 and 2010 income years. On the other hand, the GF Trust is shown on such records, as having incurred management fee liabilities to other entities in 2004 to 2010, and 2012 to 2014 income years, including to Melbourne Corporation.
Management fee claim – Philadelphia Investments – 2002 income year
I have described Philadelphia Investments in the QUD 512 judgment. Nothing in the additional evidence received in the present proceeding calls that description into question. It is one of the companies within Mr Gould’s private group of companies.
Mr Gould has given or, by instructions in relation to the Appeal Statement, caused to be given, differing accounts as to why Melbourne Corporation incurred a management fee liability of $17,000 to Philadelphia Investments in the 2002 income year.
The evidence discloses that the constitution of Anglo Australian Christian & Charitable Fund (AACCF) was adopted at a meeting on 14 November 2006. It was signed by Mr Gould and witnessed by Mr Peter Borgas (Mr Borgas). The AACCF was registered as a charity by the United Kingdom Charity Commission on 2 April 2007. Its chairman is Mr Gould. Mr Borgas is a director. The financial statements for the period ended 31 March 2008 record that the principal office of the AACCF was Russell Bedford House, London in the United Kingdom, with its trustees being Mr Gould, Mrs Gould and Mr Borgas. Russell Bedford House is the location of the offices of Lubbock Fine Chartered Accountants (Lubbock Fine). Apparently for the purposes of United Kingdom charity law, the independent examiner of the AACCF is Mr Russell Rich of Lubbock Fine. The evidence tendered from proceeding QUD 512 of 2018 discloses that Lubbock Fine is a firm with which Mr Gould has dealt over a prolonged period in relation to a number of entities under his control. According to advice given by Mr Gould to the Commissioner, the AACCF now undertakes the role of the appointor of JA Investments, another company with which Mr Gould is associated.
On the face of an entry in its general ledger for the 2010 income year, Melbourne Corporation made a donation of $210,000 to “Anglican Youth” on 22 February 2010. Another entry records that, on 1 March 2010, the AACCF transferred $210,000 to Melbourne Corporation, which was recorded as a loan.
A further ledger entry records a repayment on 20 June 2013 of $216,300, including interest of $6,300. The evidence discloses that this was funded by a purported loan from the Gould FT of $100,000, a purported loan from Melbourne Insurance of $100,000 and purported accounting services income from the AACCF of $5,500.
Melbourne Corporation’s case is that it and the trustees of the AACCF agreed in June 2010 that interest of $6,300 should accrue on the loan from AACCF to it.
This deduction claim is supported, prima facie, by the accounting entries and, in turn by Mr Gould’s evidence. The existence of a loan agreement, much less that any loan carried interest in the amount claimed is not otherwise supported by any documentary evidence. Once again, for reasons already given, that is not necessarily fatal to a deduction claim such as this.
On the evidence, Mr Gould was in effective control not just of Melbourne Corporation and Melbourne Insurance but also of the AACCF. The general ledgers were prepared under his control and supervision. Much therefore turns in relation to this deduction claim as well on Mr Gould’s credibility. Under cross-examination, Mr Gould was unable to explain why money was provided to AACCF and then came back. In itself, that is not necessarily indicative of a sham loan, only perhaps a rather clumsy round robin having no evident purpose other than the obtaining of a tax benefit. There is no satisfactory explanation as to why, assuming there was a liability to pay interest, interest was payable in the amount claimed having regard to the size of the purported loan or payable only in respect of the one income year.
The fundamental difficulty about this deduction claim is that, when the matters just noted are viewed in the context of the whole of the evidence in the case and in light of the many instances of unreliability already detailed, I am just not satisfied on the balance of probabilities that Mr Gould is a reliable historian as to the existence of a loan and the reaching of an agreement to pay interest in the amount claimed. Related to that, I have no confidence in the reliability of the ledger entries as an accurate characterisation of the nature of the payments recorded – loan and interest.
Assuming, however, that there was a loan and that that loan was subject to an agreement that interest in the amount of $6,300 was payable in the 2010 income year in respect of it, Melbourne Corporation has not proved that it withheld tax from that interest payment. The interest payment was one to an overseas person. The Taxation Administration Act 1953 required that interest be withheld. In the absence of so doing, the effect of s 26-25 of the ITAA97 is that a deduction under s 8-1 of that Act is not allowable to it, whatever might otherwise have been Melbourne Corporation’s entitlement to that deduction.
In light of these conclusions it is strictly unnecessary to reach conclusions in respect of the applicability of Fletcher’s Case or Part IVA. I do no more than indicate that I am not persuaded that the amount of the alleged interest was anything other than fiscally convenient, rather than mutually agreed, commercial compensation for the use of money. Further and in any event, overwhelmingly, the dominant purpose of the round robin and payment out with the claimed interest (if it be that) of the loan (if it be that) was, overwhelmingly, just to gain a tax benefit represented by the amount of the interest deduction claim.
For these reasons, Melbourne Corporation has failed to prove that the claim for an interest deduction in the amount of $6,300 should be allowed.
Income Reversal and Carry Forward Losses
It necessarily follows from the conclusions which I have reached as to the failure by Melbourne Corporation to discharge its onus of proof in relation to each of the management fee and interest deduction claims that there is no foundation for disturbing the Commissioner’s income reversal and carry forward loss adjustments made as a consequence of his disallowance of these deductions.
Penalties
The characterisation of conduct issues in relation to penalty are identical to those raised in proceeding QUD 512 of 2018. In the present case also, the Commissioner’s assessing position, maintained on the appeal, was that the shortfall amount resulted from intentional disregard of a taxation law, in this instance, Melbourne Corporation or, as the case may be, Photo Advertising, or their agent, resulting in a penalty of 75% of the shortfall amount pursuant to item 1 in the table in s 284-90(1) of sch 1 to the TAA. In the alternative, the Commissioner submitted that these applicants had at least been reckless and so penalties should have been imposed at a rate of 50% pursuant to item 2 in the table in s 284-90(1) of sch 1 to the TAA.
As I mention above, I readily accept that there was a there was a reasonable basis on the evidence for a submission on behalf of the Commissioner that Mr Gould was actively dishonest. For reasons given above, and although my mind has fluctuated on the subject, the conclusion which I have reached when all is said and done is that he was wilfully blind, closing his mind over a sustained period to the obvious, which was that the practices he adopted could not possibly give rise to the tax deductions claimed or assessable income or losses returned.
For the reasons given in the QUD 512 judgment, my conclusion is that Mr Gould’s conduct and that of Melbourne Corporation, is better characterised for penalty purposes as reckless, rather than an intentional disregard. For like reasons to those given in that case, I reject Melbourne Corporation’s submission (an alternative to penalty being inapplicable because of an absence of any tax shortfall) that Melbourne Corporation’s conduct should be characterised as a failure to take reasonable care. The penalty should therefore be 50% of the shortfall amount.
PHOTO ADVERTISING – QUD 399 OF 2019
Photo Advertising has appealed against the Commissioner’s objection decision with respect to amended assessments issued to it in respect of the years ended 30 June 2006 and 30 June 2011. That has become proceeding QUD 399 of 2019. The issues in dispute in that proceeding concern:
(a)the inclusion of a trust distribution from the AA Trust in is assessable income;
(b)the availability to it of carried forward losses in respect of purported management and consultancy income, interest income, and interest expenses;
(c)penalties; and
(d)interest and penalties.
The outcome of proceeding QUD 399 of 2019 depends on the outcome of proceeding QUD 512 of 2018 with the evidence in the latter (including that tendered upon re-opening) taken also to have been tendered in the former. It necessarily follows from the conclusions which I have reached in respect of proceeding QUD 512 of 2018, as detailed in my reasons for judgment in that taxation appeal, that Photo Advertising must fail in relation to its challenge to its income tax liability but succeed in relation to its penalty liability but only to the same extent as did Anglo American in relation to its penalty liability. There is no relevant distinction to be drawn in relation to the penalty outcome.
OUTCOME
I propose to afford the parties an opportunity to agree as to the minutes of orders which should be made to give effect to these reasons for judgment both in relation to Melbourne Corporation’s appeal and Photo Advertising’s appeal, or at least respectively to make submissions as to what the consequential orders should be. In so doing, the parties should also address the subject of costs.
I certify that the preceding two hundred and fourteen (214) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Logan. Associate:
Dated: 19 August 2022
10
8
0